animal spirits & Machiavelli’s Mistake

Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring.

—Robert Shiller: NYT. Shiller suggested that self-interest is not always sufficient to drive an economy or an organization. He cited Samuel Bowles recent Castle Lectures at Yale, Machiavelli’s Mistake: Why Good Incentives Are No Substitute for Good Citizens. The lectures frame classical economics as one seated in the assumption that citizens are wicked and require the discipline of laws and prices to institute morality. Whereas these drivers are designed to induce “wicked citizens to act as if they were good,” they also “induce even the good to act as if they were wicked.” Bowles, writing in the Harvard Business Review, would off-handedly describe our basic condition as follows, “When we buy, sell, produce, consume, or save, we are not only trying to get stuff – we are also trying to be a certain kind of person.” Machiavelli’s mistake anchors classical economics and interferes with this process.